“It is a leap into the unknown,” one British economist said.

The possibility that British voters will choose to leave the European Union on Thursday is prompting increasingly dire warnings from top policy makers that the move would be a financial catastrophe for the United Kingdom.

Are the doomsday predictions accurate, political fear mongering or something in between?

There is no telling exactly what will happen; a lot depends on how the country is able to renegotiate its relationship with its European neighbors. But the move carries significant economic risks for the U.K., and by extension, the world.

What European Union Membership Means

The European Union functions as a single market for trade and movement of people between its 28 member nations, and some other countries with close economic ties.

Not only are goods and services exchanged by those countries without tariffs, they also meet common product safety standards and other regulations.

The EU’s “passporting” system allows member nations’ banks to lend into, and set up branches in, all of Europe, so long as they comply with regulations in their home country.

And each country in the EU is required to admit migrants from within the union who have moved there to seek work.

If a majority of British voters choose to “leave” the EU, opting for a so-called British exit or "Brexit," it would not sever all of these ties overnight. British Prime Minister David Cameron would invoke Article 50 of the EU’s Lisbon treaty -- the clause for a country trying to leave the union -- setting off a two-year period in which the U.K. would negotiate the terms of its exit with the EU. If no agreement is reached, the U.K.’s membership would simply expire with nothing in its place. After that, negotiating a free trade deal of the kind the EU has with other non-EU countries like Canada, could take several additional years.

The Economic Risks Of Brexit

The economic concerns about a Brexit center on both the final result of the transition out of the EU and the destabilizing effect of the process in itself.

Brexit opponents, which include the vast majority of the country’s mainstream economists and economic policy makers, believe that the move would likely result in significantly less trade between the U.K. and Europe. Since nearly half of U.K. exports went to the EU in 2014, and a majority of its imports came from there, a drop-off in trade would have a negative impact on the U.K. economy, Brexit opponents argue.

The EU has little desire to make the process easy for the UK, since it wants to dissuade other countries from going down a similar path and slowly unraveling the entity.

So even if the EU grants the U.K. tariff-free trade, these critics expect, new non-tariff barriers such as regulatory asymmetry and the absence of financial “passporting” could reduce commercial flows.

Even once a new free trade agreement is reached, “the costs of accessing the Single Market would still be higher than they are now after that time,” the Organization of Economic Cooperation and Development wrote in an April report on the possible impact of Brexit.

The OECD, which represents the world’s wealthiest nations, estimates that by 2020 a Brexit would reduce Britain’s gross domestic product by more than 3 percent.

“It is a leap into the unknown,” said Kevin Featherstone, head of the European Institute at the London School of Economics. “We cannot possibly know what jobs would be lost or remain after a Brexit.”

Paul de Grauwe, chair of European political economy at the London School of Economics’ European Institute, and an opponent of Brexit, nonetheless conceded that some predictions of a Brexit-induced catastrophe are over the top.

“It is possible to generate a trade arrangement that is not that much different than deal they have today,” he said. “The uncertainty is in whether they can hammer it out.”

We cannot possibly know what jobs would be lost or remain after a Brexit.
Kevin Featherstone, London School of Economics

Adam Posen, the president of the Peterson Institute for International Economics and a former member of the Bank of England’s monetary policy committee, predicted that Brexit could prompt car manufacturers and financial service companies to leave the country rather than deal with new trade barriers and “an unnecessary amount of uncertainty.”

In the interim, while talks are under way, there is the risk that investors will sell British stocks and other holdings in the British Pound, as they look to keep their money in a safer place.

London's major stock index has been declining and the value of the pound fluctuating in response to Brexit fears in recent weeks. News that the “remain” side has gained in the polls prompted a rally in both indices on Monday.

Mark Carney, governor of the Bank of England, the U.K.’s central bank, said in May that the economic shock from a "leave" vote“could possibly include a technical recession.”

Those risks have policy makers in other countries worried about the impact that a Brexit could have on a global economy still reeling from a slowdown in demand in China and other emerging market economies. In the U.S., Brexit could boost the value of the dollar as investors seek a safe haven. That would make U.S. exports less competitive, which could have a negative impact on the job market.

Federal Reserve chairwoman Janet Yellen cited the prospect of a Brexit as “one of the factors” behind the Fed’s Wednesday decision not to raise its benchmark interest rate.

It is not just top economists who oppose a Brexit, however. The U.K.’s Labour party and the trade unions closely associated with it are campaigning against the move as well.

In addition to their fears about how the economic shock of a Brexit will affect U.K. workers, the country’s labor movement worries that leaving will enablethe U.K. to adopt lower standards for workers. And leading British environmentalists are concerned that the U.K. would not prioritize maintaining the EU’s environmental standards.

The U.K. has long been more economically conservative than its continental neighbors, favoring less regulation and public spending and lower taxes. A May report by the U.K.’s Trades Union Congress, a major labor federation, notes that until Britain joined the EU, U.K. law did not ensure that women got equal pay for equal work or received paid vacation if they were part-time workers. And joining the EU enabled British women dismissed from their jobs because of a pregnancy to immediately seek justice, rather than wait two years before doing so, according to the report.

“If we left the EU, it would be a long re-negotiation process and it would be up to this Conservative government to decide which rights to jettison and keep,” said Antonia Bance, the TUC’s head of campaigns and communications. “In time, we could lose some of the labor rights we cherish. That would be a disaster for working people and continues to be why we tell working people to vote ‘remain’ on Thursday.”

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Former London Mayor Boris Johnson, right, visits a soap factory while campaigning for a Brexit. "Leave" proponents believe leaving the EU will be good for the U.K.'s economy in the long run.

So What Is The Economic Case For Brexit?

Brexit proponents argue that leaving the EU could allow for free trade with Europe without having to deal with the continent’s burdensome regulations, open immigration and distant bureaucracy. They envision it being like the U.K.’s relationship with other countries in the World Trade Organization with whom they have tariff-free trading.

Gerard Lyons, co-chair of the group Economists for Brexit, who advised former London mayor and top Brexit proponent Boris Johnson, acknowledged that it “would be difficult to avoid a temporary shock.”

Lyons likened the short-term negative impact to the Nike “swoosh” logo: a brief dip followed by a robust upward trajectory.

Patrick Minford, a professor of applied economics at the Cardiff Business School, who, together with Lyons, co-chairs Economists for Brexit, called the widespread predictions that Brexit would result in calamity “nonsense.”

The projections of doom from the OECD, Bank of England and other official institutions, he argued, assume an erection of trade barriers that is very unlikely to occur.

A key belief underpinning the rosier economic assumptions of Minford, Lyons and other so-called Brexiteers is that the U.K. has far more leverage over the EU to shape its future ties than EU officials and other Brexit opponents are willing to let on.

The EU may have tariff-free trade among its member nations, but, directly or indirectly, it taxes imports of manufactured goods and agricultural products from outside the EU. Eliminating the EU’s “tariff wall,” as Lyons calls it, would allow the U.K. to trade freely and competitively with the entire world, something that would ultimately be a net advantage for the U.K.

The biggest thing [London’s financial district] has got to fear is regulation by the continent, which is anti-Anglo-Saxon finance.
Patrick Minford, Cardiff Business School

Freer trade with non-EU countries would give Britain the leverage to negotiate new free trade agreements with the EU, according to the Brexiteers. Outside the EU, the U.K. would be free to import cheaper cars from Asian countries, for example. To avoid a situation where they have to sell cars to the UK at lower prices, Germany in particular will try to secure a new trade agreement on cars as soon as possible, Minford claimed.

And the increased competitiveness of sectors like finance allowed by less regulation will offset any reduction in trade activity with the EU, Minford and Lyons argue.

“The biggest thing [London’s financial district] has got to fear is regulation by the continent which is anti-Anglo-Saxon finance,” Lyons said.

There is precedent for non-EU countries -- such as Norway and Switzerland -- being part of EU’s single market.

Russell Boyce/Reuters

Even if the EU were politically amenable to such an arrangement, there is a Catch 22 in Britain becoming more like Norway, the country most often cited as a model. In order to qualify for Norway’s status, the U.K. would likely have to incorporate the very EU regulations into its domestic law that so many Britons hope to be free from through Brexit.

Norway has passed laws incorporating some three-quarters of EU legislation, according to a 2012 Norwegian government report. At the same time, the report notes, Norway lacks a say in the law making process.

The EU “will not be willing to accept the U.K. being the big exception to the single market,” the London School of Economics’ De Grauwe said. “So the U.K. will have to accept common regulation.”

Scott Barbour/Getty Images
Polish advertisements in a shop window in a Polish area of London. The United Kingdom has seen a surge of immigrants from Poland and other European countries since joining the EU.

Brexit Is Really All About Immigration Any Way

Of course, much of the energy behind the pro-Brexit campaign has been driven by anger over the EU’s immigration policy, rather than its direct economic impact. For many Brexit advocates, control over Britain’s borders is a principle worth fighting for over the long term, regardless of the short-term challenges it would create. There is a perception, largely not supported by the facts, that the inflow of immigrants from poorer EU countries, like Poland, Romania and the Baltic states, is straining public resources and depressing the wages of native-born workers.

European immigrants who arrived between 1995 and 2011 were a net fiscal gain for the U.K., according to a report by the Centre for Research and Analysis of Migration. Though even economists opposed to Brexit acknowledge that the nationwide benefitsdo not preclude migration from causing greater fiscal strain in individual towns, particularly in rural areas.

Anger over immigration has raised the fortunes of anti-EU demagogues like Nigel Farage, a member of the European parliament and head of the U.K. Independence Party. Farage is under fire for a pro-Brexit poster UKIP produced that features an image of asylum seekers from the Middle East crossing into Europe with the words “Breaking point: the EU has failed us all.”

Minford and Lyons, both self-described believers in free trade and free markets, distance themselves from the populist claims of Farage and those he represents. They acknowledge the enormous benefits that the U.K. has reaped from immigration.

But the economists believe it is Britain’s right to create its own immigration system to admit skilled workers, rather than unskilled ones, not unlike the models that are in place in the U.S. and Australia. Foreign workers with lower skills and lower earnings strain public resources, even when they do not receive direct cash benefits, they maintain.

“Migration is good news for the country, but we do not have a sensible migration policy,” Lyons concluded.